|
on Utility Models and Prospect Theory |
| By: | Butler, Jeffrey V.; Guiso, Luigi; Jappelli, Tullio |
| Abstract: | Prior research suggests that those who rely on intuition rather than effortful reasoning when making decisions are less averse to risk and ambiguity. The evidence is largely correlational, however, leaving open the question of the direction of causality. In this paper, we present experimental evidence of causation running from reliance on intuition to risk and ambiguity preferences. We directly manipulate participants' predilection to rely on intuition and find that enhancing reliance on intuition lowers the probability of being ambiguity averse by 30 percentage points and increases risk tolerance by about 30 percent in the experimental sub-population where we would a priori expect the manipulation to be successful (males). -- |
| Keywords: | Risk Aversion,Ambiguity Aversion,Decision Theory,Dual Systems,Intuitive Thinking |
| JEL: | D81 D83 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:201313&r=upt |
| By: | Cosaert, Sam; Demuynck, Thomas |
| Abstract: | The theory of revealed preferences offers an elegant way to test the neoclassical model of utility maximization subject to a linear budget constraint. In many settings, however, the set of available consumption bundles does not take the form of a linear budget set. In this paper, we adjust the theory of revealed preferences to handle situations where the set of feasible bundles is finite. Such situations occur frequently in many real life and experimental settings. We derive the revealed preference conditions for consistency with utility maximization in this finite choice-set setting. Interestingly, we find that it is necessary to make a distinction between the cases where the underlying utility function is weakly monotone, strongly monotone and/or concave. Next, we provide conditions on the structure of the finite choice sets for which the usual revealed preference condition (i.e. GARP) is still valid. We illustrate the relevance of our results by means of an application based on two experimental data sets that contain choice behavior from children. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ner:leuven:urn:hdl:123456789/399983&r=upt |
| By: | Simon Dietz; Anca N. Matei |
| Abstract: | Many investments involve both a long time-horizon and risky returns. Making investment decisions thus requires assumptions about time and risk preferences. In the public sector in particular, such assumptions are frequently contested and there is no immediate prospect of universal agreement. Motivated by these observations, we develop a theory and method of finding ‘spaces for agreement’. These are combinations of classes of discount and utility function, for which one investment dominates another (or ‘almost’ does so), so that all decision-makers whose preferences can be represented by such combinations would agree on the option to be chosen. The theory is built on combining the insights of stochastic dominance on the one hand, and time dominance on the other, thus offering a non-parametric approach to inter-temporal, risky choice. |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:lsg:lsgwps:wp137&r=upt |
| By: | Cheung, Ka Chun; Dhaene, Jan; Kukush, Alexander; Linders, Daniël |
| Abstract: | In this paper we show that under appropriate moment conditions, the supermodular ordered random vectors X = (X1;X2; : : : ;Xn) and Y = (Y1; Y2; : : : ; Yn) with equal expected utilities (or distorted expectations) of the sums X1 +X2 +: : :+Xn and Y1 +Y2 +: : :+Yn for an appropriate utility (or distortion) function, must necessarily be equal in distribution, that is X d=Y . The results in this paper can be considered as generalizations of the results of Cheung (2010), who presents necessary conditions related to the distribution of X1 + X2 + : : : + Xn for the random vector X = (X1;X2; : : : ;Xn) to be comonotonic. |
| Keywords: | supermodular order; concordance order; expected utility; distorted expectation; comonotonicity; |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ner:leuven:urn:hdl:123456789/375156&r=upt |
| By: | Potoms, Tom; Lauwers, Luc |
| Abstract: | We introduce and axiomatize two quasi-orderings that extend preferences on a set to its power set. First, a modified version of indirect utility takes into account the number of maximal elements in the opportunity set. This rule meets Puppe's axiom of preference for freedom. Second, an averaging rule takes into account the number of non-maximal elements in the opportunity set. Such a rule satisfies the Gärdenfors principle. Axioms that involve no more than two alternatives capture the differences between the two rules. |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:ner:leuven:urn:hdl:123456789/415143&r=upt |
| By: | Rahul Deb (University of Toronto); Debasis Mishra (Indian Statistical Institute, New Delhi) |
| Abstract: | We study mechanism design in a setting where agents know their types but are uncertain about the utility from any alternative. The lnal realized utility of each agent is observed by the principal and can be contracted upon. In such environments, the principal is not restricted to using only transfers but can employ security contracts which determine each agent's payoff as a function of their realized utility and the profile of announced types. We show that using security contracts instead of transfers expands the set of (dominant strategy) implementable social choice functions. Our main result is that in a lnite type space, every social choice function that can be implemented using a security contract can also be implemented using a royalty contract. Royalty contracts are simpler and commonly used security contracts, in which agents initially pay a transfer and keep a fraction of their realized utility. We also identify a condition called acyclicity that is necessary and suncient for implementation in these environments. |
| Keywords: | dominant strategy implementation, acyclicity, security contracts, royalty contracts, cycle monotonicity |
| JEL: | D44 D71 D82 D86 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:ind:isipdp:13-05&r=upt |
| By: | Nobuhiko Terui; Shohei Hasegawa |
| Abstract: | In this study, we develop structural models of preference change due to consumer state dependence through satiation by purchase experience. A dynamic factor model with switching structure is proposed to explain consumer preference changes. Two types of dynamic factor models are separately applied to baseline and satiation parameters in a direct utility model that accommodates multiple discreteness data. The first dynamic factor model has a switching structure for consumer preference, and decomposes brand baselines into time-invariant factor loadings for the coordinates of brand positions and time-varying factor scores for consumer preference directions. The second dynamic factor model applied to satiation parameters extracts the consumer level of satiation in a product category, and this is used as a causal variable in a switching equation to show when and how preferences change over time according to the level of brand satiation. The brand positions and temporal changes of heterogeneous preferences are jointly depicted in a dynamic joint space map. The empirical analysis of a panel dataset shows that our proposed dynamic model, implying that consumers change their preferences when previous brand satiation exceeds the admissible level and preference directions are determined by the previous level of satiation, performs better than alternative specifications, such as a static model with no preference change and a dynamic model without structures which imply that preference changes whenever a consumer purchases a product. |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:toh:tmarga:112&r=upt |
| By: | Bouckaert, Nicolas; Schokkaert, Erik |
| Abstract: | We analyse participation in medical prevention with an expected utility model that is sufficiently rich to capture diverging features of different prevention procedures. We distinguish primary and secondary prevention (with one or two rounds) for both fatal or non-fatal diseases. Moreover, we introduce a flexible relationship between the specific disease for which the prevention procedure is set up and the general background health of the individual. We show how these various possibilities change the comparative statics of the prevention decision and we test the differential predictions with data from SHARE (Survey of Health, Ageing and Retirement in Europe) about participation in mammography, dental caries screening and .u vaccination. |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:ner:leuven:urn:hdl:123456789/403598&r=upt |
| By: | Renaud Bourlès (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales [EHESS] - Ecole Centrale Marseille (ECM)); Yann Bramoullé (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales [EHESS] - Ecole Centrale Marseille (ECM)) |
| Abstract: | We provide the first theoretical analysis of altruism in networks. Agents are embedded in a fixed, weighted network and care about their direct friends. Given some initial distribution of incomes, they may decide to support their poorer friends. We study the resulting non-cooperative transfer game. Our analysis highlights the importance of indirect gifts, where an agent gives to a friend because his friend himself has a friend in need. We uncover four main features of this interdependence. First, we show that there is a unique profile of incomes after transfers, for any network and any utility functions. Uniqueness in transfers holds on trees, but not on arbitrary networks. Second, there is no waste in transfers in equilibrium. In particular, transfers flow through indirect paths of highest altruistic strength. Third, a negative shock on one agent cannot benefit others and tends to affect socially closer agents first. In addition, an income redistribution that decreases inequality ex-ante can increase inequality ex-post. Fourth, altruistic networks decrease income inequality. In contrast, more altruistic or more homophilous networks can increase inequality. |
| Keywords: | private transfers; social networks; altruism; income redistribution; income inequality |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00881451&r=upt |
| By: | Johan Eyckmans; Sam Fankhauser; Snorre Kverndokk |
| Abstract: | This paper discusses the ethical underpinnings of climate finance. We ask what the optimal flow of financial assistance for mitigation (to reduce emissions), adaptation (to become climate resilient) and development (to increase income) would be if rich countries care about the inter- and intragenerational distribution of consumption in the world. The question is framed as a two-period game of transfers between two regions, North and South. We show that the level of financial assistance from the North will depend on the North’s concern about well-being in the South, which we model as a Fehr-Schmidt utility function. Our main conclusion is that in the absence of market failures (e.g., barriers to adaptation or a weak carbon constraint) the most effective instrument to promote adaptation and mitigation in the South is a development transfer. In pure equity terms, development aid is a more effective instrument for achieving both intergenerational- and intragenerational equity. |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:lsg:lsgwps:wp123&r=upt |